Real Estate E1:R2
◢ Recovery is not beginning to reach the middle of the housing market, and encouraging activity can be seen both demand-side and supply-side
◢ The number of construction permits is still down 25.1% y-o-y but continues to increase at a steady pace each month
Iran’s Housing Market Turns Bullish
The housing market in Iran is beginning to show signs of a sustained recovery, following two years of poor results. Whereas sales of properties at the affordable and luxury ends of the market have continued to see reasonable volumes, investors have been waiting to see if the recovery will reach the middle of the market. Encouragingly, total sales figures for the first quarter of the Iranian calendar year 1395 (March 20 2016-June 20 2016), show a rise in the volume of sales for apartments between 50-90 square meters.
Rising consumer demand suggests that the real estate market will return to a "bull" market in the second half of this year. Already, investment activity in the construction sector seems to indicate confidence about the impending recovery. The number of construction permits issued has risen steadily in the past few months. Last week, a government spokesman said that IRR 120 trillion of this year’s construction budget will be spent within the following months in government backed projects, ensuring supply keeps up with rising demand.
The Statistical Center of Iran (SCI) reports that in the last quarter of 1394, 1,802 construction permits were issued, up by around 4.1% from the previous quarter, but a decrease of 25.1% y-o-y. The SCI's report further added that based on the information obtained by municipal authorities from issued construction permits during last year’s winter, permits issued covered a total land area of 578,400 square meters. This area increased by around 53.3% from spring, but decreased by 29.5% y-o-y. The average land area per construction permit was 321 square meters. As it takes time for new-build residential units to reach the market, we expect the latent decrease in supply and the rising demand over the next few months to reach a new equilibrium on which the recovery will be built.
Much of this recovery is being driven by new loan facilities made availible to consumers. Lower interest rates and new incentive packages such as the waiving of an initial down-payment are encouraging consumers to make new purchases. But more can be done. Streamlining the allocation of mortgage loans, decreasing the required term for deposits before receiving a loan, increasing the repayment period, reducing loan interest rates, and simplifying the required conditions to help applicants make use of first home saver accounts all need to become standard practice.
Inflation and the Housing Market
The relatively small y-o-y increase in sales volume is not yet being matched by a recovery in house prices. However, for the first time in over a year, the growth in rental prices will match the inflation rate. This is more a function of the government's ability to bring inflation under control, but it nonetheless represents a healthier situation for the housing market.
27% Increase in Y-O-Y Sales Volume
The volume of apartment deals in Tehran witnessed a 4% decrease in the month of Tir versus the previous month. However, sales of 14,700 residential units during Tir marked an increase of 27% from the same period last year, reflecting the housing markets moves out of recession. The steady pace of transactions may reflect a move towards a boom. The low fluctuation in house prices during the past month was partly due to market delays during the second half of the holy month of Ramadan (ended on 6 July) – the Ramadan holidays were in the first month of Tir and caused closure of the housing market during some of the period.
According to a report by the Central Bank of Iran in the month of Tir 1395, housing units sold through Tehran’s real estate agents averaged around IRR 42.3 million per square meter, which is an increase of 0.1% and 4.4% from the past month and last year, respectively. The year-on-year rental price index in Tehran and all other urban areas also increased by 9.5% and 10.3% respectively.
Housing Losing Edge Among Investments
Investment in real estate has for many years been a popular way to seek high returns or store value in an uncertain economic environment. However, looking at common investment classes of stocks, housing, forex, coins, and savings from the beginning of the current Iranian calendar year, housing is lagging behind. The coin market has had the highest returns with a 7.3% price increase. Money market accounts have offered Iranians 5.75% returns, accounting for inflation. The foreign exchange market achieved 2.1%. Housing lags behind with returns of just 1.4%, which Iran's capital markets are down 7.1% this year for investors.
The low returns seen for speculators in the housing market is a good corrective as it will enable homebuyers to return to a market long dominated by investment activity that interfered with prices in various corners of the market, particularly in the area of luxury homes. Bringing the core of construction activity back to the middle market to alleviate supply challenges will involve development companies prioritizing homebuyers over real estate speculators once again.